China’s rising costs are India’s big chance

India is emerging in the spotlight of multinational companies as a wave of labour unrest and wage hikes in China’s foreign factories, making your Apple iPhone to Honda cars, portends the close of an era of cheap Chinese exports, writes Reshma Patil.

India is emerging in the spotlight of multinational companies as a wave of labour unrest and wage hikes in China’s foreign factories, making your Apple iPhone to Honda cars, portends the close of an era of cheap Chinese exports.

Why no rush yet

1. Many foreign companies in China want to relocate over the next three to five years

2. India may be a desired destination, but the main drawback is bad infrastructure

3. To calm fears, China on Saturday announced steep growth in GDP, investment

The debate now rippling as an undercurrent among foreign businesses in China is whether India — with cheaper labour, cheaper cost of living but crumbling infrastructure — can be a future alternative to China.“Foreign firms across all sectors in China are actively looking at India and the frequency of investment inquiries from China has increased more than ever before,’’ a diplomatic source told the Hindustan Times in Beijing.

Taiwan companies will consider moving factories to India, Indonesia and Vietnam in the next three to five years as costs in China rise, the Economic Daily News reported this week from Taiwan, citing Arthur Chiao, chairman of the Taiwan Electrical and Electronic Manufacturers’ Association.

This month, Taiwanese Foxconn, the maker of Apple products, hiked wages by nearly 66 per cent after a series of 10 workers suicides and labour unrest in its Shenzhen plant, and reportedly began plans to relocate some factories back to Taiwan. Honda factory workers in China are negotiating pay hikes and the right to form unions. Minimum wages are being hiked by governments nationwide from northern Beijing to southern Shenzhen.

The rising cost in Chinese factory cities was seen coming. Earlier this year, a Taiwanese shoemaker producing millions of Adidas shoes in south China’s Guangzhou --- the world’s shoe factory --- began expanding operations to south India’s Guntur and Kadapa in Andhra Pradesh where 3,000 workers will make three lakh shoes a month.

The interest from foreign investors is evident through a mood tilting toward India more than a rush to relocate, because investors worry that erratic power supply and poor roads escalate manufacturing costs.

In May, Microsoft CEO Steve Ballmer said that China is a ‘less interesting market to us’ than India and Indonesia. “India is not perfect but intellectual property protection in India is far, far better than it would be in China,” Ballmer was quoted saying in Vietnam.

“A year ago, such a comment (from Microsoft) would have been inconceivable,’’ China expert and Forbes columnist Gordon Chang told the Hindustan Times from New York. “Now, it is becoming accepted wisdom that China no longer maintains a welcoming environment for foreign business. Although almost all foreign companies will stay in China, it’s clear that many are considering reducing their commitment to the country. India, unlike China, has not decided to close its internal market to outsiders.”

On Saturday, Beijing’s commerce ministry tried to turnaround the debate by releasing impressive figures. China’s economy, which grew 11.9 per cent in the first quarter, attracted 38.92 billion dollars of FDI from January-May, up 14.31 per cent from a year ago. China approved 9,638 foreign-funded ventures from January-May, up 22.15 per cent from last year.

The Chinese media picked up a quote from Morgan Stanley economist Andy Xie saying on Thursday that ‘a doubling of China’s manufacturing wages over the next five years won’t deter foreign investment because Asian rivals such as India and Indonesia lack comparable infrastructure’.

Apache, which started its first India factory over a year ago in Nellore, Andhra Pradesh, and is expanding to Guntur, Kadapa and Uttarkhand this year, did not respond to requests for an interview. The diplomat who observed the deals said the company needed to diversify out of China and avoid ‘putting all eggs in one basket’.

Chang pointed out that China has a new paradigm of promoting its own enterprises as ‘national champions’. “The indigenous innovation rules are of particular concern to foreigners,” he said.

The overdue wage hikes will boost China’s domestic demand, but there are concerns of copycat strikes. “All it takes now is a single spark and news will spread all over China, which could lead to similar industrial action in other factories,” Paul Tang, chief economist at Bank of East Asia in Hong Kong, told Reuters. More strikes were reported this week from a Sino-Japanese Honda plant, a Taiwanese sports goods supplier and a Japanese sewing machine maker. Even as hiring Chinese labour is getting costlier, the Adidas shoemaker in India plans to increase its workforce.